Tuesday, 24 February 2015

The UK tax system crudely divides people's income into 'investment income' and 'earned income'.

By and large, investment income is only liable to income tax, not National Insurance. NI is a regressive tax, so in % terms, this exemption benefits basic rate taxpayers more than higher rate taxpayers. The logic behind this is highly tenuous, it is based on The Big Lie that NI is a kind of pension or unemployment insurance, but there you go.

However, investment income (i.e. income from shares) differs from earned business income in that you cannot claim any expenses against it. So you cannot claim a deduction for interest paid on money you borrow to buy shares (except in very narrow and actually quite sensible circumstances). (Employees struggle to claim any expenses whatsoever of course, but they are always bottom of the heap and taxed most heavily).

Proper businesses i.e. the self-employed can claim most expenses as business expenses (and rightly so) but they are liable to some NI at least (although at half the rate of employees). Again, fair enough, you don't want to tax initiative too highly, better to tax the plodders.

As per usual, landlords get the best of both worlds. For NI purposes, it is investment income and hence exempt, but magically, for income tax purposes it is earned or business income and interest is an allowable expense.

So it ought to be one or t'other. As it happens, the extra tax that would be raised if landlords had to pay NI or couldn't claim interest against tax is in the order of £2 or £3 billion a year, the figure she gave, which is a probably a lucky guess on her part.

Whether you earmark this extra money for building social housing or anything else (like reducing taxes on employment) is irrelevant. It's about trying to make the tax system reasonably coherent.

The Green leader, who revealed her party now had 54,500 members, also defended the policy of taxing wealth - from property to luxury cars - amid claims it would raise only a fraction of the £45 billion claimed by the party.

Ms Bennett told Today: 'What we are talking about is, we don't want to just tax property, because that excludes about two-thirds of wealth, we also want to tax pension pots, holdings in cash, Ferraris, whatever else it might be.'

Daft cow.

£45 billion is pie in the sky. £4 billion would be an optimistic estimate (i.e. as much again as Inheritance Tax), realistically it would be naff all.

Pension pots are taxed as they are primarily shares i.e. dividend income, which is received out of net corporate income after VAT, Business Rates and corporation tax have been paid. Cash holdings are taxed, via negative real interest rates plus income tax just to bayonet the survivors. Ferraris are taxed (VAT, fuel duty etc).

I assume that when she says 'property' she means land and buildings. In income generating terms, it is not one-third of total 'wealth', it's more like two-thirds. More to the point, if you tax all wealth at the same rate, it would have to be a very low rate (0.5% a year or something) otherwise people just don't pay it (which is why wealth taxes in the narrow sense have been phased out in most countries).

But you can merrily tax land and buildings at 2% or 3% of current values and the tax base is scarcely eroded because they can't just disappear or be moved or hidden abroad. See also: Business Rates.

4. Call me cynic

Is it possible that Ms Bennett is a fifth columnist, parachuted in by TPTB to discredit the Georgist and environmentalist movements?